Hospitals struggle to find space as demand for outpatient care outpaces new construction

While overall sales remain muted, pricing for MOBs that did trade in Q2 was marginally higher. The median price per square foot climbed to $374, up from $371 in the previous quarter, while the median capitalization rate—a measure of investment yield—rose to 6.8% from 6.7%.

Despite sluggish sales, demand for medical office space continues to grow, and occupancy rates are reaching new highs even as new construction lags.

According to Martin, national MOB occupancy in the top 100 U.S. markets rose to 92.8%, with aggregate demand for space substantially outpacing the completion of new buildings. She noted that about 16 million square feet were absorbed over the past year—meaning they were leased or occupied—while only about 14 million square feet of new space was delivered. Martin attributes this trend to a combination of factors, including an aging population, greater longevity, increased emphasis on wellness and preventive care, and the migration of medical procedures from inpatient to outpatient settings.

Martin highlighted that new MOB construction starts have slowed markedly, accounting for less than 1% of the sector’s total inventory over the past year. “There’s really very little new supply, and a lot of demand for space, which is continuing to push occupancy higher and higher,” she said.

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This imbalance between supply and demand is affecting major health systems. Jennifer Siemen, director of real estate strategy at Chicago-based Northwestern Medicine, said during the webcast that securing adequate medical space has become more challenging, particularly as the organization looks to expand. Northwestern, which operates 11 hospitals and over 280 locations across more than 17 million square feet, has concentrated on leasing existing, so-called “second-generation” medical spaces as a cost-saving measure, but often finds such spaces require significant upgrades.

“The lack of new supply does create a challenge, especially when we have a growth plan that we are ready to execute on,” Siemen said. “Because there is not much supply, it’s really challenging, and a lot of times we’ll find second-generation space that is very dated and requires a significant investment.” She added that rising construction costs are leading Northwestern to look more closely at optimizing their existing facilities.

Regarding Northwestern's real estate strategy, Siemen said ownership remains their preference, especially given their long-term presence in most spaces and the significant investment required to fit out medical facilities. The health system owns all its inpatient locations and more than three-quarters of its outpatient MOBs. She noted, however, that other hospitals may revisit their ownership strategies to free up capital for larger projects, given current market conditions.

This shift means that more medical care is being delivered in MOBs, which are facing high demand and tight supply. As health systems and private practices try to navigate this environment, they may look for ways to optimize all their operations. Benefits brokers could become more critical partners by helping these clients manage their employee benefits costs, which are a major expense, freeing up capital that can be used for real estate projects, facility upgrades, or other strategic investments.